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August 7, 2006

Polygon Blocks ?346 million Telent Sale

LONDON (HedgeWorld.com)--Polygon, the activist hedge fund, succeeded today in blocking a ?346 million ($654 million) bid for Telent, the rump of Marconi, the telecom equipment maker. Polygon is the biggest shareholder with a 24% stake held through its Global Opportunities Master Fund.

Fortress Investment Group, a U.S. private equity firm, had bid to take the company private, a move that was supported by Telent management. Mike Parton, the Telent chief executive, would have made nearly ?9 million had the sale gone through. The deal had backing from other hedge funds and institutional investors.

Though an extraordinary shareholders meeting voted 58.7% to 41.3% in favor of the deal, that margin failed to meet the 75% threshold required to make the offer binding under the scheme of arrangement through which the takeover was structured. Just fewer than 60% of shareholders cast their ballots.

"The board believed the scheme offered attractive value to shareholders and, therefore, regrets this result," Telent said in a press release. "The board will continue to implement its business plan to position the company as a leading communications services business focused on the telecommunications and enterprise markets in the U.K. and Germany and is confident that it has the strategy to grow the business successfully."

Fortress can't revisit its existing bid for 12 months under the rules of the United Kingdom's Takeover Panel. It could, however, raise the ?5.29 ($10) per share offer at any time with a new bid.

After the vote was announced on Aug. 4, Telent stock slumped 4% but quickly recovered to close 1.2% higher at ?4.90. Despite expectations in recent days that the Fortress offer would fail, several funds have built or opened long positions.

Henderson Global Investors bought a 1.2% stake in Telent on Aug. 3 for both long-only and hedge fund vehicles. DE Shaw, the New York hedge fund operator, sold 0.7% of Telent's outstanding stock short, but has a warrant expiring in 2007 for 1.8% of the company. Also on Aug. 3, Arnhold and S. Bleichroeder Advisors bought a 1.6% stake primarily through derivatives, while Boussard & Gauvadan Asset Management acquired a 2.1% interest.

Polygon is thought to believe that further value can be realized out of Telent. At stake is not just a telecoms services business with annual revenues of ?300 million, but also control of the former Marconi's ?3 billion pension fund and a further ?490 million of cash sitting in an escrow account. Telent management said the money is ring-fenced to ensure the pension fund's solvency.

"Basically it is back to business as usual until future notice," said a source close to Telent. Asked to comment on where matters might go now, the source said: "Polygon is just another shareholder, though it is a large one." Reached at its London office, Polygon declined to comment.

Polygon owned 13.6% of Telent before Fortress made its offer in May. It attempted to carve out a role beside Fortress in leading the takeover but was rebuffed by the Takeover Panel, which ruled that the move was unfair to other shareholders. Polygon has attracted criticism here for blocking the deal via its long holding, while actively shorting up to 14% of Telent stock, so leaving it with a net position of around 10%. In recent weeks, however, the hedge fund has unwound much of its short position, leaving it with a net exposure of nearly 19%.

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